Why Rich Chinese Are Investing Overseas (It’s Not What You Think)

Property prices in Vancouver might be cooling, but as a favored destination for Chinese money the respite might only be temporary.

According to a joint report by consulting firm McKinsey & Company and Minsheng Banking Corp. on China’s private banking sector, the number of wealthy Chinese is rising quickly and they’re looking to shift more of their investments overseas.

Reuters

Vancouver has long been a popular destination for rich Chinese looking to emigrate, but the current round of overseas investors from the world’s second-largest economy may have other goals in mind.

The number of China’s high net worth individuals – defined as someone with more than $1 million to invest – increased 15% annually from 2010 to 2012, according to the report’s estimate. It forecasts their numbers to rise 19% annually between now and 2015, to 1.9 million people from 875,000 in 2010.

Advertisement

According to the report, which was based on interviews with 700 high net-worth individuals in 29 Chinese cities, roughly 60% of China’s wealthy have assets overseas. This group keeps only about 10% of their investment funds offshore, the survey found, but more than half said they hoped to increase that percentage over the next five years.

Most surprising, though, were the reasons China’s wealthy choose to invest overseas, which were not unlike their counterparts in the rest of the world. While governments around the globe are raffling off residency perks to attract Chinese money, immigration was cited as a reason for investing overseas by only 23% of respondents. And children’s education was a reason for only 16%.

Instead, diversification of risk was a major reason for 86% of respondents, and 76% cited having access to a wider range of investment products. Under no illusions about the relatively dire state of the global economy, only 15% said they were hoping for a higher return overseas than what’s available in China.

A lack of investment products has always been a problem in China. That’s started to improve in recent years with the development of trust companies – which have found a niche using private wealth to make loans to customers the banks won’t touch – and private equity, although investors are fast falling out of love with the sector as domestic funds struggle to deliver on advertised returns. Moreover, the major investment outlets of developed economies – the stock market and corporate bonds – remain underdeveloped in China.

The report doesn’t offer comparisons with how China’s wealthy felt about investing overseas in the previous years, but it’s likely that the need for diversification wasn’t as much of a priority in the past. An appreciating yuan meant that any overseas investment would have to yield a return in excess of however much the yuan had risen, which was particularly tricky in those years the yuan rose in excess of 7%. Moreover, with the global economy in the doldrums and Chinese property prices spiraling upward until mid-2012, diversifying overseas was a low-return or even losing proposition.

Now that China’s economy is slowing – and the yuan is in a funk – it makes more sense for China’s rich to hedge their bets by keeping more funds overseas. Moreover, China’s elite are nervous about what the leadership handover will mean for their political fortunes, and by extension their wealth.

The report paints a picture of China’s rising wealthy class at odds with the image of the world-beating engineer-turned-entrepreneur from Beijing that looms so large in Western imagination. According to the survey, 49% of China’s wealthy don’t have a university degree. And almost 50% of China’s high net-worth individuals are from neither tier-one nor tier two-cities (although more than 70% of them are clustered around the Pearl River and Yangtze River deltas).

The message of the rest of the world is that China’s rich are multiplying – and they’re not content to stay at home.

About China Real Time Report

China Real Time Report is a vital resource for an expanding global community trying to keep up with a country changing minute by minute. The site offers quick insight and sharp analysis from the wide network of Dow Jones reporters across Greater China, including Dow Jones Newswires’ specialists and The Wall Street Journal’s award-winning team. It also draws on the insights of commentators close to the hot topic of the day in law, policy, economics and culture. Its editors can be reached at chinarealtime@wsj.com.